The Next High-Stakes Quest

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1 The Next High-Stakes Quest Balancing Employer and Employee Priorities Global Talent Management and Rewards Study

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3 The Next High-Stakes Quest Balancing Employer and Employee Priorities Table of Contents Executive Summary 2 Key Findings 4 Introduction 5 The Stragetic Value of the EVP 6 What Outcomes Can an Organization Achieve From its EVP? 9 Gains in Attraction, Retention and Sustainable Engagement 9 Building Blocks for Effective Design and Delivery 10 Best Practices in Design, Delivery and Execution Within the Total Rewards Portfolio 14 Processes and Tools That Support Effective Execution 18 Conclusion 22 About the Study 23 Key Terms and Definitions Global Talent Management and Rewards Study 1

4 Executive Summary What Fuels Your Organization? In today s volatile global economy, organizations are struggling to establish and maintain an effective and affordable attraction, retention and engagement strategy. Along with accelerating changes in talent markets and workforce demographics that affect how employers find and keep employees, cost challenges continue to play a major role and will do so in the decades to come. In fact, for companies in many parts of the world, cost containment remains the greatest concern. Not in recent history have we seen such rapid movement in economies, and workforce demand and availability. Even as organizations continue to rein in operational costs, many push expectations for employee and fi nancial performance ever higher. As a result, the workforce is often providing greater efforts without the promise of greater rewards. So it s no surprise that the Talent Management and Rewards Survey, which surveyed 1,605 employers globally, fi nds that companies are having diffi culty attracting and retaining the highpotential and critical-skill employees necessary to increase their global competitiveness. Almost three in four organizations report diffi culties attracting critical-skill employees, and more than half report diffi culties retaining them. Our research also found that not all employers are taking advantage of opportunities to attract and retain high-value employees by offering the rewards most important to them. Growing global competition leaves the demand for the right talent as strong as ever, and drives the stakes for attracting, keeping and engaging critical-skill talent even higher. In addition, data from our 2012 Global Workforce Study (see About the Global Workforce Study, page 23) show that employees are experiencing high levels of stress at work. In the Talent Management and Rewards Survey, more than half of all employers report that employees have been working more hours than normal for the past three years. Nearly as many employers (43%) say they expect to maintain that pace for the next three years as well. As they shoulder these growing challenges, it s no wonder employees are increasingly anxious, riskaverse and security-minded. In the Global Workforce Study (GWS), workers continue to express serious Not in recent history have we seen such rapid movement in economies, and workforce demand and availability. 2 towerswatson.com

5 As they shoulder these growing challenges, it s no wonder employees are increasingly anxious, risk-averse and security-minded. doubts about accountability, preparedness for their futures, career advancement and, most critically, rewards for their performance. The complexities of managing a global workforce addressing external factors affecting the competitiveness of cost structures, sourcing talent and understanding people across cultures have rendered the work environment unsettling, at best, for both employers and employees. And through this uncertainty, one constant is the pressure to tightly manage costs. Organizations continue to shift some of their increasing cost and risk burden onto employees, while at the same time trying to fi nd a formula to avoid the potential impacts of this strategy on attraction, retention and business performance. None of which speaks to engagement, which will be threatened if this pace continues. Employers have essentially driven higher performance while at the same time depleting the fuel that powers the engine of the organization. Asking employees to work so hard for so long is unhealthy for individual employees as well as the organization itself. However, while this report presents a frank perspective on today s work environment, it also highlights the organizations that get the employeremployee balance right and win signifi cant returns from doing so. As employers endeavor to deliver profi table growth in a period of economic volatility, their focus needs to be on crafting and communicating an employee value proposition (EVP) that helps to attract and retain employees with critical skills, and engage all workers by striking a reasonable balance between employee and employer needs. Achieving these objectives requires focusing scarce program resources on the key drivers of sustainable engagement, and sharpening and differentiating the organization s EVP for critical employee segments. Some companies are more effective at this than others. The result? Organizations that have segmented the workforce and that deliver customized EVPs for critical employee segments are nearly twice as likely as companies with more tactical and less integrated EVPs to report fi nancial performance substantially above their peer group. This report will explain the defi nition of sustainable engagement and the evolution of the EVP. We will also review the total rewards best practices employed by successful organizations and the positive outcomes they are experiencing. Understanding these concepts, and the impact they have on the organization and the workforce, can help any organization at any level of development improve future results Global Talent Management and Rewards Study 3

6 Key Findings Attraction Almost three-quarters of survey respondents (72%) cite problems attracting critical-skill employees. About six in 10 have diffi culty attracting highpotential and top-performing workers (60% and 59%, respectively). In addition, 43% have problems attracting diverse employee populations. Retention Almost six in 10 companies report diffi culty retaining critical-skill employees; similar proportions have diffi culty retaining high-potential employees and top performers. More than four in 10 respondents also cite issues retaining employees with tenures of 18 months to three years. Sustainable Engagement Employers that have segmented the workforce and deliver customized EVPs for critical employee segments are more than four times as likely to report that their employees are highly engaged than organizations with more tactical, less integrated EVPs. More than three times as many employees (58% versus 16%) are highly engaged at companies that have highly effective EVPs than at companies with low EVP effectiveness. Segmentation and Differentiation Only 18% of the survey respondents have differentiated their EVP from other organizations with whom they compete for talent. Organizations that have segmented the workforce and that deliver customized EVPs for critical employee segments are nearly twice as likely as companies with more tactical and less integrated EVPs (27.6% versus 14.5%, respectively) to report fi nancial performance substantially above their peer group. Measurement and Monitoring Organizations with a highly effective EVP are more than twice as likely to capture external benchmarking data on talent management programs, and about 60% more likely to examine trends in total rewards program design, than companies with less developed or poorly executed EVPs. They are also about 60% more likely to assess business performance and conduct other analytics to review total rewards programs. Eight in 10 organizations with highly effective EVPs regularly monitor the effectiveness of most of their programs, far above the rate of other organizations. What Financially High-Performing Companies Get Right Financially high-performing organizations stood out in this year s Talent Management and Rewards Survey as exemplars of engagement and performance. Why? One reason is they exhibit dramatically stronger consistency in global talent management and reward program design, in many cases, with 20% to 30% higher prevalence in design consistency than other survey participants. Almost invariably, fi nancially high-performing companies achieve consistency and integration in the design and administration of programs not just for leadership, but for all employees. Not surprisingly, fi nancially high-performing companies also enjoy advantages in attracting and retaining employees. On the other hand, they experience different attraction and retention risks as well. Employees working in fi nancially highperforming companies report much less ability to manage workrelated stress, and they feel excessive pressure in their jobs, although they want to stay even if work is available elsewhere. They also report lower levels of trust in senior leadership. While global program design consistency may not make sense when there are varying needs across different employee populations, the trade-off is very often worthwhile, given the correlation with higher fi nancial results. But even highperforming companies need to take care, and be sure to follow through on the leadership and work/life balance promised by their EVP. 4 towerswatson.com

7 Introduction A Real-Time Strategy for Achieving the Right Balance In this, the 17th year of our global research on talent management and reward trends, it s never been more important to get the balance between employer and employee priorities right. And our fi ndings indicate there is a prescription for doing so: ensuring workers get what they need in such a way that the organization realizes healthier fi nancial results, improved employee engagement, and an easier time attracting and retaining people with the skills they need (Figure 1). Although it may require a journey through several levels of diffi culty to achieve and maintain such a balance, the quest begins with the formal articulation of the EVP. Each step beyond that is progressively more valuable as organizations strengthen, sharpen, segment and differentiate their employee deal. The journey can be rewarding for the whole organization right from the beginning. Even the fi rst level (i.e., articulating a formal strategy) brings fi nancial returns to the organization. However, communicating and delivering on EVP promises, segmenting the workforce to create differentiated EVPs for critical workforce segments, and developing associated total rewards programs can produce a treasure trove of higher sustainable engagement and better fi nancial performance. Part of the solution for companies and workers alike lies in sustainable engagement, which Figure 1. Difficulties attracting and retaining key employee groups continue despite variable economic conditions To what extent is your organization experiencing problems attracting/retaining employees in the following groups? Problems attracting* Problems retaining* All employees 31% 25% Critical-skill employees 72% 56% High-potential employees 60% 55% Top-performing employees 59% 50% Diverse employee populations 43% 31% Recent university graduates 18% 20% Employees with tenures between 18 months and three years NA 43% * Percentages represent the percentage of respondents having diffi culty to a moderate or great extent. denotes the intensity of employees connection to their organization. We view sustainable engagement as more than a willingness to give discretionary effort. In a high-pressure business environment, if employees are to contribute fully to driving fi nancial success, they require the energy to maintain their efforts and the enablement to overcome obstacles to productive work. Sustainable engagement is thus marked by committed effort to achieve goals and objectives in environments that maintain productive, energized performance. Employees who are highly engaged are not only engaged, but also enabled and energized by their managers, leadership and the organization s employee deal. Sustainable engagement is thus marked by committed effort to achieve e goals and objectives in environments that maintain productive, energized er performance. rm Global Talent Management and Rewards Study 5

8 The Strategic Value of the EVP EVP is a term that has become increasingly familiar over the past several years. But although cited frequently, it s often misunderstood. The EVP is an implicit contract, or deal, between employer and employee, articulating the nature of the experience the employer offers in exchange for the employee s dedication, productivity and sustainable engagement. The EVP defi nes the give and the get between company and worker, encompassing every aspect of the employment experience from the organization s mission and values; to jobs, culture and colleagues; to the full portfolio of total rewards programs. Articulated and executed well, the EVP can position a company s employment deal as unique and help bind employees to the organization. Having a relevant and sustainable EVP is vital, particularly in a highly competitive global talent market. For employers, the design of talent management and reward programs is perhaps the area in which they have the most opportunity to differentiate themselves from their competitors. A strategically designed EVP attracts, retains, motivates and engages employees to help drive business success. For employees, well-designed total rewards programs are the embodiment of the business strategy, informing every aspect of how they will be compensated for their efforts. A well-executed total rewards program design shapes their overall view, emotional connection and the level of discretionary effort employees will bring to their company. A company s total rewards program is a key component of the EVP typically the aspect that makes the EVP most visible to employees. As you ll fi nd in this report, companies that have adopted an increasingly integrated approach to reward strategy, design and delivery decisions supported by an overarching EVP have achieved signifi cantly stronger outcomes from their talent management and reward programs. EVP Development: The Four Groups On the whole, the formal employee deal is still a relatively new concept for many organizations. Organizations facing tighter labor markets, such as those in fast-growing economies, are considerably more likely than those in developed economies to have an articulated EVP in place. Our survey identifi ed four groups (see The Towers Watson EVP and Total Rewards Index, page 7) of organizations along the EVP evolutionary process across our global sample. Group 1. Have not progressed in developing a total rewards approach or a formal, articulated EVP. Group 2. Have formally articulated an EVP and adopted a total rewards approach. There is a greater focus on an integrated strategy for managing rewards and talent, and they have stated objectives for each reward and talent management program. It should be noted that some lessening of attraction and retention diffi culties, an increase in highly engaged employees and better fi nancial outcomes can be seen as soon as an organization articulates its EVP. Group 3. Have effectively communicated their EVP to employees and delivered on their EVP promises. Group 4. Have differentiated their EVP from other organizations with whom they compete for talent and have customized EVPs for critical workforce segments. This group is more likely to achieve better outcomes than their peers: fewer attraction and retention diffi culties, more highly engaged employees and better fi nancial outcomes. Tactical Integrated and Strategic Group 1 26% 32% Communicating and Delivering Segmenting and Differentiating Group 4 Group 3 18% Group 2 23% Percentages represent companies in each group across the global sample. 6 towerswatson.com

9 The Towers Watson EVP and Total Rewards Index Our EVP and Total Rewards Index (EVP and TR Index) measures a company s progress in creating, communicating and delivering its EVP and total rewards strategy and differentiating itself from other organizations with which it competes for talent. Companies that score the highest on the EVP and TR Index (Group 4) demonstrate better fi nancial performance, more sustainable engagement, and stronger attraction and retention results than companies that score lower (Groups 1 3). To create the EVP and TR Index, we assessed (and assigned a relative score) to all companies in this year s Talent Management and Reward Study across 10 questions about creating, communicating, delivering and differentiating the EVP. The following checklists were developed from the questions we asked about organizations progress with regard to total rewards and the EVP. Together, they create a road map for employers that seek to achieve sustainable engagement of the workforce and globally competitive fi nancial performance. Benchmarks of an Effective EVP Developing a formal EVP Effectively communicating the EVP to employees Aligning the EVP with what the organization stands for in the marketplace Delivering on EVP promises Differentiating the company from competitors in the labor market Designing customized EVPs for critical employee segments Total Rewards Elements Articulating a total rewards strategy aligned with the business and HR strategy Using business strategy and objectives to inform talent management and reward programs Creating specifi c objectives for each talent management and reward program to align them with the EVP Employing organizational analytics (i.e., business performance analytics, workforce demographics, workforce performance data) to test the effectiveness of total rewards programs EVP and TR Index The EVP and TR Index measures a company s success in creating, communicating, delivering and differentiating its EVP. Attraction and retention Sustainable engagement Financial performance Outcomes Job architecture and job leveling Competencies Foundational rewards Performancebased rewards Career and environmental rewards Performance management Technology Managerial effectiveness Strategy Segmentation Design EVP and TR Differentiation Delivery Supporting tools and processes Global Talent Management and Rewards Study 7

10 Measurement and analytics are critical in determining the effectiveness of programs and making course corrections to heighten effectiveness. The Role of Measurement To interpret the progress an organization makes along the EVP and total rewards journey, the results of its programs must be meaningfully evaluated. Measurement plays an important role in determining the effi cacy of reward and talent management programs. Measurement provides directional information for the organization which programs are working, which are not and suggests changes that may be needed to specifi c programs, whether simple calibrations or wholesale modifi cations. Organizations with a highly effective EVP take a more rigorous approach to measurement than those at lower levels of EVP effectiveness. These Group 4 organizations also emphasize distinct types of measurement that provide rich data for workforce analytics and better program decisions. For example, most companies measure certain traditional benchmarks (e.g., competitive market data on pay and benefi t levels) and use widely accepted measurement tools such as employee exit interviews. But companies further along the EVP journey are more likely to employ unique measurement methods that assess correspondingly more valuable inputs. About two-thirds of the organizations in Group 4, for example, collect line manager and senior leadership feedback as well as conduct employee opinion surveys compared with less than half of Group 1 companies (Figure 2). Group 4 organizations those that segment the workforce and differentiate themselves from competitors for talent collect unique data as well. They are more than twice as likely to capture external benchmarking data on talent management programs than organizations that have not progressed in developing a formal EVP. Group 4 organizations are also about 60% more likely to examine trends in total rewards program design. These companies are more rigorous with analytics, too again, about 60% more likely to access business performance analytics, and 70% to 80% more likely to use workforce demographic and performance data. Measurement and analytics are critical in determining the effectiveness of programs and making course corrections to heighten effectiveness. Organizations with highly effective EVPs have a signifi cant advantage over those that have made less progress: The rigor and innovation they apply to measurement are useful in improving their reward programs across the board. Figure 2. Organizations with high EVP effectiveness conduct more workforce analytics Which of the following methods does your organization use to collect data about total rewards? (multiple responses allowed) Global Group 1 Group 2 Group 3 Group 4 Employee and leadership research Conjoint analysis to determine employee reward preferences 12% 7% 12% 10% 22% Employee focus groups 23% 15% 22% 25% 36% Employee opinion surveys 51% 40% 48% 60% 64% Employee exit interviews 58% 53% 56% 66% 62% Line manager feedback 55% 44% 55% 61% 65% Senior leadership feedback 55% 45% 55% 60% 68% External benchmarking Competitive market data on pay and benefi t levels 90% 86% 92% 89% 92% External benchmark data on leading talent management practices 48% 32% 48% 53% 67% Data on marketplace prevalence of reward and talent management programs 53% 40% 56% 59% 68% Trends in total rewards design 55% 43% 57% 61% 68% Organizational analytics Business performance analytics 59% 46% 59% 67% 73% Workforce demographic data 45% 34% 48% 49% 59% Workforce performance data 47% 36% 41% 55% 64% 8 towerswatson.com

11 What Outcomes Can an Organization Achieve From Its EVP? Organizations that have made more progress toward full realization of a formal EVP and total rewards strategy have achieved superior fi nancial performance. Group 4 companies also report higher sustainable engagement, and have fewer attraction and retention diffi culties. They have done the hard work of evolving their EVP through effective strategy, design and execution, each element building upon the former. And while organizations gain an advantage from having a formally articulated EVP, the highest value comes from a successful journey through the entire EVP evolution. In this and subsequent sections, we ll look at the relationship between having a formally articulated EVP and total rewards strategy coupled with successful program design and execution against that strategy and improvements in fi nancial results, sustainable engagement, and attraction and retention outcomes. Gains in Attraction, Retention and Sustainable Engagement To begin with, companies that have advanced further through the steps of developing an EVP are less likely to report attraction and retention challenges. This is particularly true in fast-growing economies, where EVPs are both more prevalent and in light of the tighter markets for talent more needed. For example, in fast-growing economies, Group 4 companies are 13% less likely to report diffi culty attracting critical-skill employees and 23% less likely to have retention problems than less integrated Group 1 organizations (Figure 3). In addition, Group 4 organizations are fi ve times as likely to report their employees as highly engaged than Group 1 organizations. As a result, Group 4 companies are more than twice as likely to report achieving fi nancial performance signifi cantly above their peers. We found similar results when looking at employee attitudes in our recent GWS. Employees who indicate their employers have an effective EVP are more than three times as likely to be highly engaged as employees who say their organization has low EVP effectiveness (Figure 4). Figure 3. Organizations that have progressed their EVP and total rewards strategy realize better outcomes Overall Global Fast-growing economies Developed economies Group 1 Group 4 Group 1 Group 4 Group 1 Group 4 Problems attracting critical-skill employees 72% 73% 70% 86% 75% 66% 60% Problems retaining critical-skill employees 56% 58% 50% 78% 60% 49% 40% Financially high-performing organizations 19% 14% 28% 12% 30% 16% 22% Highly engaged employees 13% 6% 27% 6% 30% 6% 26% Figure 4. Employees who believe their organizations have a more effective EVP are more likely to be highly engaged Overall Low EVP effectiveness High EVP effectiveness Highly engaged 35% 16% 58% Unsupported 22% 22% 22% Detached 17% 20% 13% Disengaged 26% 42% 8% Global Talent Management and Rewards Study 9

12 Our GWS also revealed that one reason employees respond so favorably to a well-executed EVP is that having a formal EVP along with the strategy, design and execution that support its realization is strongly related to good communication with employees. Regardless of populations, it s important to understand how employees respond to their organization s EVP. Employees lack of knowledge of the EVP is related to retention risk. Often, those at risk for leaving don t know what the employment deal is, or have unrealistic and unwarranted expectations. Employees may become disengaged (and at risk of leaving) if they think their organization has failed to deliver on what they believe it has promised. Building Blocks for Effective Design and Delivery An effective total rewards strategy optimizes the total rewards portfolio to meet business and workforce objectives. There are three core underpinnings that an organization needs to develop in order to promote effective design and delivery across the total rewards spectrum of foundational, performance-based, and career and environmental reward programs. These underpinnings are job architecture and job leveling, and an emphasis on competencies and workforce segmentation. Job Architecture and Job Leveling Whether an organization is global or domestic, large or small, formal job architecture accompanied by a systematic approach to job leveling establishes the basis for consistency and integration in the design of talent management and reward programs. This best practice enables employers to consistently and fairly apply total rewards programs, and help employees navigate their careers. Organizations also report that doing job leveling well makes workforce analytics and planning easier. Towers Watson s Perspective on Total Rewards Towers Watson takes an integrated and comprehensive view of total rewards and the EVP. Our core philosophy incorporates total rewards as a critical element within the larger EVP highlighting our belief that every total rewards program should align with business strategy, optimize an organization s return on investment and drive required employee behaviors. Aligning rewards with business results through business strategy is an effective way to ensure that reward investments achieve organizational goals. A key differentiator in our approach is the organization of rewards into three categories that align with how employees think about rewards. 1. Foundational: Reward programs provided as a condition of employment, including salary and core benefi ts 2. Performance-based: Reward programs provided for superior performance, including incentives 3. Career and environmental: Rewards that provide an engaging work experience, including career development, training, work/life balance and fl exible work programs In the broader context, total rewards comprise a major portion of the deal between employer and employee. In today s volatile global business climate, companies need to review and refresh their EVP and total rewards programs regularly or they risk losing ground (and people) to more nimble competitors. 10 towerswatson.com

13 Figure 5 details to what extent key programs refl ect global job architecture in the respondent s organization, from expected highs of 85% in compensation, and 78% in staffi ng and selection, to scores just over half in prospective, but increasingly important, areas such as workforce analytics and succession management. Organizations with more advanced EVPs are much more likely to align pay progression with career progression, and they link reward and career programs to a common job architecture. Figure 6 explores this outcome in more depth and shows that, in some cases, Group 4 companies sometimes have nearly twice the positive outcomes as their Group 1 counterparts at least a 25-percentagepoint gain in all cases. Companies that score higher on the EVP and TR Index are more likely to create these design linkages, because they pave the way for effective integration and execution downstream. Figure 5. Job architecture and job leveling serve as the foundation for effective design and delivery of total rewards programs Percentage agreeing that the following programs reflect the global job architecture at their organization. Overall Group 1 Group 2 Group 3 Group 4 Workforce analytics and planning 56% 35% 53% 58% 80% Staffi ng and selection 78% 63% 82% 82% 88% Career management 66% 47% 66% 70% 82% Learning and development 67% 50% 68% 68% 84% Performance management 74% 58% 82% 75% 83% Compensation 85% 70% 89% 88% 92% Benefi ts 63% 51% 60% 66% 78% Total rewards and career framework 69% 47% 73% 72% 86% Succession management 59% 38% 58% 63% 78% Organizations with more advanced EVPs are much more likely to align pay progression with career progression, and they link reward and career programs to a common job architecture. Figure 6. Companies with a highly effective EVP are more likely to have a common job architecture, and linked reward and career programs Which of the following statements are true for your organization? Group 1 Group 2 Group 3 Group 4 My company has a common job architecture that is used to defi ne all jobs 60% 72% 79% 87% The reward and career programs at my organization are linked to a common job architecture 48% 67% 78% 82% Pay progression is aligned with career progression at my organization 65% 78% 84% 87% Global Talent Management and Rewards Study 11

14 One of the key challenges that organizations face is that many managers are stretched beyond their ability to perform, often having insufficient time to handle the people aspects of their job and feeling unsupported in the process. Competencies As a best practice, fi nancially high-performing companies are much more likely to report that their development plans are informed by the company s competencies. While many companies have competency models, high-performing companies are doing more linking competencies to other reward and talent management programs. Just under half of organizations in our survey report doing so. One key to successful programs is to have globally consistent job levels with scaled competencies aligned with a job family architecture. This integrated approach ensures consistency across the organization and clarity for employees as they seek to understand both their current role, and the skills and experience required to advance along possible career paths. Organizations that put these building blocks in place are signifi cantly more likely to report that their performance management programs are more effective in communicating performance expectations, rewarding employees based on performance, and making the connection between performance and career management (Figure 7). One of the key challenges that organizations face is that many managers are stretched beyond their ability to perform, often having insuffi cient time to handle the people aspects of their job and feeling unsupported in the process. Organizations that have created the structure necessary to improve their performance management process, through common job family architecture, job leveling and scaled competencies, report that their managers are much more effective in a number of ways (Figure 8). Figure 7. Aligning competencies with job levels correlates with more effective performance management processes How effective is your organization s performance management process in the following areas? Job family architecture, job leveling and scaled competencies Other organizations Difference Communicating expectations for organizational performance 77% 54% 43% Creating a high-performance culture 73% 44% 66% Linking salary increases to individual performance results 82% 57% 44% Linking bonus payouts to individual performance results 79% 61% 30% Linking bonus payouts to organizational performance results 88% 68% 29% Differentiating pay based on performance even for employees who receive the same performance rating 60% 39% 54% Incorporating competencies into our performance management process 63% 36% 75% Incorporating career development into our performance management process 57% 31% 84% Figure 8. Aligning competencies with job levels supports higher manager effectiveness across performance management and pay How effective are the managers in your organization in the following aspects of performance management? Working with employees to set appropriate performance goals for individual performance Giving employees regular coaching and feedback on their performance Conducting career development discussions as part of the performance management process Explaining possible career opportunities or available career paths Fairly refl ecting overall performance in the employee s fi nal performance rating Job family architecture, job leveling and scaled competencies Other organizations 72% 47% 53% 60% 34% 76% 51% 28% 82% 42% 23% 83% 75% 48% 56% Utilizing performance results to determine development plans 60% 31% 94% Differentiating performance between high and low performers 76% 48% 58% Fairly refl ecting performance in pay decisions 74% 49% 51% Difference 12 towerswatson.com

15 Segmentation As noted earlier, segmentation of the workforce is a best practice that enables everything from good strategy to effective design. But segmentation can fall short in execution if delivery does not back up the prior steps. For example, in all but the most effective EVP companies (Group 4), fewer than half of the organizations that identify high potentials inform them of their status (Figure 9). This may deprive high-potential employees of access to programs that might help them grow into the leadership candidates their employers expect them to be. And it creates a needless retention risk. To maximize the contribution of their high potentials, organizations with the best execution notify these employees of their status. This best practice lays the groundwork for ongoing career management, and it signals that employees will experience differentiated treatment in other programs as well. Figure 9. Organizations with highly effective EVPs are more likely to segment their workforces and communicate To what extent do you agree with the following about your organization? Group 1 Group 2 Group 3 Group 4 Formally identifi es employees with critical skills 38% 64% 69% 81% Formally identifi es top-performing employees 54% 76% 82% 87% Formally identifi es high-potential employees 47% 69% 74% 88% Informs employees who have been identifi ed as high-potential employees 23% 33% 38% 65% Segmentation of the workforce is a best practice that enables everything from good strategy to effective design. The Importance of Segmentation to Sustainable Engagement One impediment to realizing sustainable engagement is that many organizations fail to segment the workforce. This deprives them of the opportunity to differentiate or formally structure recruiting and staffi ng programs for particular groups of employees. For example, while two-thirds of employers do formally identify high-potential employees, only 37% actually inform those employees of their status. Not doing so squanders opportunities for valued employees to engage in related developmental activities. It also creates avoidable retention risks. Organizations that effectively segment their workforce are more likely to reinforce the drivers of enablement. By enablement, we mean employees are less likely to encounter obstacles in doing their jobs well, are more likely to believe they have the work resources and tools to do an exceptional job, and more likely to feel their team is able to meet its work challenges effectively. Group 4 organizations are also more likely to take calculated risks and to have contingency plans for dealing with these risks. And they are more likely to have in place the job architecture that enables segmentation. Many of these companies have found that deploying integrated talent and reward technology helps them identify, manage and monitor different talent segments. While segmentation is not a pure science, the discipline of thinking about the workforce in differentiated ways, and designing and delivering programs accordingly, can lead to better results for any organization Global Talent Management and Rewards Study 13

16 Design, delivery and execution of total rewards are areas in which organizations have the most opportunity for differentiation. Best Practices in Design, Delivery and Execution Within the Total Rewards Portfolio Design, delivery and execution of total rewards are areas in which organizations have the most opportunity for differentiation. Taken together, these elements make manifest reward strategy, rendering it tangible for employees. After all, the elements of talent management and reward programs inform every aspect of how employees will be recognized and rewarded for their efforts. This section explores best practices in design, delivery and execution for key total rewards programs from foundational, to performancebased, to career and environmental. Figure 10. Foundational rewards: Base pay is the number one driver of attraction and retention globally To what extent do you agree with the following statements? Group 1 Group 2 Group 3 Group 4 Employees understand how their base pay is determined 39% 61% 63% 75% Our managers execute our base pay program well 38% 54% 67% 72% Our base pay program supports our attraction and retention goals 42% 62% 67% 82% Our base pay program supports our longterm business goals, strategy and objectives 40% 51% 65% 76% Our base pay program supports our desired culture 34% 54% 64% 79% Base Pay Given the importance of base pay as a key global driver of both attraction and retention, organizations need to ensure the baseline competitiveness of salaries to support their attraction and retention goals. Best practice organizations ensure there is a clear line of sight between employee performance and pay. They communicate the value of the employee s total rewards package through both traditional and innovative means, such as statements and portals. And they periodically assess employee attitudes and reward preferences through employee surveys, focus groups or a total rewards optimization process. More than twice as many organizations with high EVP and TR Index scores report differentiated base pay as companies with lower scores. Group 4 companies are also about 90% more likely to report that their base pay program supports attraction and retention goals, as well as the desired culture, that employees understand the program and that managers execute it well (Figure 10). On the other hand, base pay is an area that could benefi t signifi cantly from more effective execution, particularly when it comes to communication. Just over half of organizations report that employees understand how their base pay is determined (57%) or believe their managers execute the base pay program well (55%). As for employees, fewer than half (47%) say their organization does a good job of explaining their base pay programs, and only four in 10 (42%) believe there is a clear link between their job performance and their pay. 14 towerswatson.com

17 Incentive Compensation Getting incentive compensation right is one of the most potent ways for organizations to align employee behaviors with business objectives and reinforce the value of high performance. While a majority of organizations report no changes to eligibility or targets for annual incentives, our survey shows that more than twice as many companies reported increasing incentive eligibility last year as those that reported decreasing it. Additionally, four times as many companies reported an increase in incentive targets over the last year as those that reported decreasing them (Figure 11). However, these modest increases in bonus eligibility and opportunity are not keeping pace with increasing expectations for organizational and individual performance. Nearly four in 10 survey participants (38%) reported that expectations for organizational performance had increased, and under one-third (30%) said individual performance expectations had increased. Even more organizations expect the performance bar to be raised in the next 12 months. Continually ratcheting up expectations without commensurate increases in earning opportunities has the potential to sap employees energy levels and reduce productivity. Organizations have an opportunity to reinforce the message that greater performance is highly valued by increasing the extent to which pay and bonus awards are differentiated on the basis of employee performance. Recognition As with base pay, organizations are more likely to achieve best practices in recognition if they are in the context of a highly effective EVP. Group 4 organizations are more than twice as likely to report that recognition programs support long-term business goals. They are also almost twice as likely to say that recognition programs support their desired culture. Employees in these organizations are more likely to understand how recognition programs are determined, and managers are more likely to be seen as executing these programs well (Figure 12). Figure 11. Performance-based rewards: Incentive compensation is key to communicating organizational priorities How have the following aspects of your organization s short-term incentive/bonus programs changed within the past 12 months? Global Asia Pacific EMEA Latin America North America Eligibility Decreased 5% 8% 3% 4% 2% Stayed the same 83% 76% 85% 82% 89% Increased 13% 16% 12% 14% 9% Individual incentive targets Decreased 5% 6% 9% 3% 2% Stayed the same 75% 68% 74% 73% 84% Increased 20% 26% 17% 24% 13% Figure 12. Performance-based rewards: Well-designed recognition programs reinforce desired culture, behaviors and results Percentage agreeing with statements about performance-based recognition at their organization. Group 1 Group 2 Group 3 Group 4 Employees understand how recognition awards are determined 47% 72% 77% 87% Our managers execute our recognition programs well 33% 53% 61% 76% Our recognition programs support our attraction and retention goals 35% 57% 76% 82% Our recognition programs support our longterm business goals, strategy and objectives 36% 60% 77% 83% Our recognition programs support our desired culture 54% 70% 80% 88% Our organization monitors the implementation of our recognition programs to make sure they are consistent with program objectives and guidelines 47% 69% 76% 86% Recognition programs at my organization have a specifi c role in our total rewards portfolio 41% 60% 75% 83% Continually ratcheting up expectations without commensurate increases in earning opportunities has the potential to sap employees energy levels and reduce productivity Global Talent Management and Rewards Study 15

18 Social recognition programs, which have emerged recently as a way to involve employees in directly recognizing each other s contributions, hold the potential to expand the use and effectiveness of recognition programs. In general, Group 4 companies execute recognition programs better than Group 1 companies do, but these programs sometimes fall short in terms of manager execution. Just over half of survey respondents believe that managers implement these programs effectively. From our perspective, this is an area where added emphasis on delivery could be the key to achieving the benefi ts that recognition programs were intended to create. Social recognition programs, which have emerged recently as a way to involve employees in directly recognizing each other s contributions, hold the potential to expand the use and effectiveness of recognition programs. One-quarter (26%) of our global survey sample is using social recognition in some form, most commonly the fi nancially higherperforming companies, one-third of which (33%) are among the early adopters of social recognition. Career Management One reason that higher-scoring companies on our EVP and TR Index are successful is that creating an effective EVP demonstrates an understanding that the employment relationship is a two-way street. These employers recognize that workers expect something in return for their commitment and investment in the organization. So it s not surprising that organizations highest on the EVP and TR Index demonstrate the greatest distinction from their Group 1 counterparts in the area of career management, a top driver of attraction and retention across all employee groups. Companies with highly effective EVPs are more than twice as likely to have an articulated career management philosophy. As we noted above, Group 4 organizations are also more likely to have a global job family architecture, with global job leveling and scaled competencies to create structure for their philosophy. At these organizations, managers are more effective at providing career support for employees, and employees are more likely to understand how they can infl uence their careers. Group 4 organizations are also likely to have developed effective tools and resources for career management, and career management programs that support their attraction and retention goals (Figure 13). On the other hand, career management is one of the most frustrating processes for employees. Our GWS found that many employees say they do not understand how they can infl uence their careers and report that managers are currently not effective at providing career management support to employees. This leaves a signifi cant gap between where employees want to go and the suffi cient resources to get there. The opportunity to advance in their careers is a key driver of employee attraction and retention. While about three-quarters of organizations hold formal talent discussions at top levels of the organization, far fewer hold discussions with employees at lower levels. This is an area in which articulation and differentiation of the EVP can make a signifi cantly positive difference especially in key employee segments by helping employees understand the opportunities available to them and how to develop a career with the organization. Figure 13. Career and environmental rewards: Organizations with high EVP effectiveness have more effective career management programs To what extent do you agree with the following statements about the way career management programs are currently designed and implemented at your organization? Group 1 Group 2 Group 3 Group 4 We have an articulated career management philosophy 18% 30% 45% 70% Employees understand how they can infl uence their careers 18% 33% 48% 70% Managers are effective at providing career management support to employees 19% 28% 43% 61% Our organization has developed effective tools and resources for career management 17% 25% 43% 64% Our career management programs support our attraction and retention goals 19% 38% 54% 70% Employees at our organization are frequently able to achieve career advancement by moving across organizational boundaries, geographies, functions and business units 34% 47% 55% 78% 16 towerswatson.com

19 Talent Mobility Thinking about a global approach? According to the 2012 Global Talent Mobility Study by Towers Watson and workforce mobility association Worldwide ERC, over the next two to three years, nearly half of multinationals expect to increase traditional international assignments. Because of the many talent mobility challenges organizations face, they need to balance their selection priorities. For example, almost seven in 10 employers (69%) cite prohibitive costs as a major challenge, while more than half mention high housing costs (55%) or cost-of-living allowances (51%). Roughly two-thirds of companies report spending approximately two to three times the assignee s annual salary on each traditional expatriate assignment. Adding to the complexity, our GWS reports that many employees now more anxious about the future, security-minded and risk-averse may not value mobility or perceive it as a reward. Yet significantly, when selecting candidates to be transferred, business needs are consistently cited as the most popular criteria. Multinationals may be overlooking equally important factors, such as helping employees understand what s available to and expected of them in related career opportunities. For example, only 16% of companies consider family circumstances when making selections. And yet family and personal situations, or a family s inability to adapt to the host country culture cited by 57% and 21% of respondents, respectively are often reported as primary reasons for failed international assignments. Despite these difficulties, only 35% of organizations in our Talent Management and Rewards Survey have developed special programs to promote international mobility. Companies with more evolved EVPs back up their talent mobility process with effective delivery. They are over 80% more likely to identify employees who are internationally mobile and more than twice as likely to develop special programs to promote international mobility. Organizations with highly effective EVPs are also more than twice as likely to have a talent brokerage function (i.e., a way to leverage information from key HR data streams to match demand with supply and deliver best-fit candidates) and also to require international experience from employees who wish to advance into leadership positions. Effective segmentation, backed by action, also helps an organization think more broadly about its global talent strategy, unify its related programs and, most important, provide employees with the career opportunities that are so critical to attraction and retention. Any organization stands to benefit from a strategy refining its talent mobility goals, an effective plan design that motivates employees to take international assignments and efficient execution to smooth the process. How employees in director/manager/supervisor/professional roles view international assignments Which of the following most closely reflects your willingness to relocate to advance your career? I would be willing to relocate, regardless of global location I would be willing to relocate, but only to certain locations All employees Under age 30 Age Age Age 50 and older 19% 29% 21% 18% 15% 48% 56% 54% 45% 43% I would not be willing to relocate 33% 15% 25% 36% 42% Source: 2012 Global Workforce Study Global Talent Management and Rewards Study 17

20 Leadership Development According to our GWS, leadership is the top driver of sustainable engagement globally. Are leadership development programs creating effective leaders? Survey responses show that employers believe they are good at leadership development. A large majority (76%) say their leadership development programs support their attraction and retention goals. An even greater percentage (85%) believe their programs support long-term business goals, strategy and objectives, and 84% believe their programs support the desired culture. The reported effectiveness of leadership programs in our current study, however, is most dramatic among Group 4 companies (Figure 14), which are about 40% more likely to monitor the effectiveness of these programs than Group 1 companies that are operating in an unintegrated way. But while employers are convinced of their effectiveness in this area, neither employees nor leaders have such a positive outlook. For example, when employees are asked whether or not they believe senior management is doing a good job of developing future leaders, less than four in 10 (39%) indicate they are good or very good. Signifi cantly, more than half of employees (54%) at high-performing companies see their senior leaders as good or very good at building leaders for the future. Processes and Tools That Support Effective Execution Companies that have achieved more advanced levels in the evolution of their EVP specifi cally emphasize execution. As a consequence, their results are stronger than any other group of organizations in our survey. Group 4 organizations have more effectively aligned their talent management and reward programs with broader business goals. They have designed programs that help them achieve these goals, and they have employed solid delivery methods to make their programs work throughout the organization. Getting the execution right is often the most challenging aspect for companies. Effective execution has a critical impact on outcomes, however, whether due to thorough performance management execution, the overall effectiveness of managers, the successful implementation of technology tools to support delivery of reward and talent management programs, or measuring and monitoring outcomes. In fact, Group 4 companies are 70% to 90% more likely to be fi nancially high performing than Group 1 companies that have not progressed their EVP or those in Group 2 that have simply articulated their strategy. Successful design and execution are also both related to the ultimate goal of sustainable engagement. The following section details the processes and tools that support effective execution. Figure 14. Career and environmental rewards: Leadership development is the top driver of sustainable engagement Our organization s leadership development programs: Group 1 Group 2 Group 3 Group 4 Support attraction and retention goals 61% 66% 84% 89% Support long-term business goals, strategy and objectives 75% 93% 85% 94% Support the desired culture 75% 85% 84% 94% Are monitored to make sure they are consistent with our objectives and guidelines 66% 78% 73% 93% Companies that have achieved more advanced levels in the evolution of their EVP specifically emphasize execution. 18 towerswatson.com

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